Lehman Brothers’ collapse didn’t shake the markets that much. OK, there was a tremor, but to a large extent the credit markets (if not the stock markets) had been expecting to to fail, and credit swaps were sort of already pricing in that information. By comparison, AIG is/was expected to survive.

NR was a big deal for the UK – the largest securitisation base of any UK mortgage lender, but compared to the likes of HBOS (which, is also in trouble, to be fair – see the post I’m about to make!), it’s relatively small. AIG is enormous. AIG is like Bagpuss – when Bagpuss goes to sleep, all his friends go to sleep, and the failure of AIG of AIG really would hurt the world economy.

AIG seems, at the moment, too big for anyone but a national government to prop up. It’s not like Lehman, Bear Stearns, or even HBOS – there is no raider coming in to buy it up for 10% of what it used to be worth.

The “bailout” of AIG might actually be a good deal for the US taxpayer – OK, the Fed is taking on a big risk in making the loan – $85bn – but it’s getting 80% of the company in return. Unlike when the UK Government made a loan to NR, and, well, got a thank you letter from the shareholders.

It’s a pig though – on Saturday I’m meant to be giving a speech about the Credit Crunch, and what it means to UK investors, but the world is changing on a daily basis this week, and I’ve had to re-write some slides more than once :-)

It’s “the right move at the right time for the right reasons”, according to Prime Minister Brown.

This might be a true statement, if you constrain yourself to looking at this morning’s decision in isolation.

Of course, the courts might yet decide that it was a really bad decision, and the Government have to pay a lot more than they’re assuming.

However, if you look at the overall way the crisis has been handled, it’s an object lesson in how to bungle government big-time, and back the country into a corner where nationalisation is the only option.

Quick summary:

Northern Rock’s board embarked on a fast-growth strategy that used securitisation to help fuel a massive expansion.

The strategy misfired, and the bank had to run to first the Bank of England, and then the treasury for help.

The treasury came up with a clever plan where they promised to help the bank in a way that meant that you and I (the taxpayers) would carry the losses if the rescue failed, but that the shareholders would take the bulk of the gain if it worked.

In today’s announcement, the Government are basically saying that they’ve worked out the flaw in the plan :-)

However, it may be too late. A general principle of UK law (and for that matter, European law) is that you can’t enter into a contract and then change your mind without penalty.

The current shareholders of NR (trading has been suspended) now have to wait for a public sector panel to “value” the shares… and the panel is going to value them as if the guarantees never existed.

The legal challenge that will, inevitably, be made is that the guarantees DID exist.

Very few people seem, to me, to have covered themselves in glory on this.

The Chancellor appears out of his depth [see below.]

The Prime Minister, who seems to refuse to accept that his government has done anything wrong, and consistently tries to spin the discussion into how a few jobs (in marginal constituencies) have been saved at the expense of enough money to employ 100 times as many people elsewhere.

The Conservatives appear to be trying to get the Chancellor out, rather than concentrating on anything that might benefit the country as a whole.

The original board of NR who have, at least, in the main resigned.

So who has earned my respect:

Ron Sandler, the man brought in as the new exec chairman to try to sort out the problem. He seems to be telling the truth, and refusing to make glowing spin, but instead concentrating on making things work again as quickly as possible.

The Liberal Democrats. Vince Cable, their treasury spokesman has been recommending nationalisation for a while, and signs are he might have done so immediately it was sensible, rather than creating the murky legal waters that Darling has done so.

I do admit, however, to feeling sorry for Mr. Darling – he is caught in a government that believes in managerialism – the idea that all problems can be solved if you work hard enough at them. Sadly, the right answer for a few labour MPs with low majorities isn’t the right answer for the good governance of the country.

Sadly, there’s enough evidence around to suggest that creating a level playing field, where sadly some companies DO fail, overall provides a better result for everyone – because new companies feel that the big incumbents aren’t given an unfair advantage, they are more likely to enter a market, creating more customer choice and more jobs!

Economies can cope with companies going under. They can’t cope so well with governments that tinker and U-turn, and put politics first.

Of all the reports about Northern Rock over the last six months, the one that has consistently impressed me most is Robert Peston, of the BBC.

In the latest twist, Robert reports that SRM, a Hedge Fund who currently own about 10% of Northern Rock have written to the Government, making it clear that if the Government try to Nationalise NR at less than a “fair price”, they will sue for damages.

The story then goes on to report how SRM have arrived at a “fair price”, and how difficult it is to value failing businesses.

I have a solution. I’ve no idea whether it would hold water legally, but it has a certain “business logic” and “natural justice to it.”

I wonder whether it could apply to all “companies on the verge of nationalisation”, not just NR…

Run an auction with a twist

Buyers would have to demonstrate (before entering the auction) that they had the funds in place

The government would have the RIGHT, but not the OBLIGATION (ie an option), for 24 hours after the auction closed, to buy, at a 10% premium over the “hammer price”

Of this 10%, half (5% of the highest bid) would be an uplift to the price the sellers of the business received

The other half (5% of the highest bid) would go to the highest bidder

Why have I suggested this?

The purpose of the first 5% is to demonstrate, clearly, that the government is paying “fair price”.

The purpose of the second 5% is to make sure that potential bidders are encouraged to bid up to their highest price – because for just making the offer, and putting down no cash, they MIGHT end up with a 5% profit straight away.

The purpose of making it an OPTION is to make sure that no-one over-bids in the hope of that 5% profit – there would be a good chance that the Government would leave them swinging with their over-priced asset :-) And, of course, to make sure that the Government only bought if they REALLY felt it was in the national interest.

Would bidders play? Asia is awash with rich financial institutions at the moment!

Alistair Darling, the UK Chancellor, is intending to give more power to the Financial Services Authority (FSA), to help prevent a repeat of the Northern Rock fiasco.

The plans aren’t finalised yet, because Mr. Darling has promised three months of consultation with the financial services industry, but the headlines seem likely to be that:

He will create an “emergency-response” committee that will form in the event of any NR-style problem.

The FSA will get the power to seize bank’s cash, and ring-fence it so that depositors have even more confidence that their savings are safe.

It’s possible that he’ll create new powers allowing the FSA to split up troubled banks into two sections, and give one of them the deposits and the “safe debts”, and the other the dodgy debts. (OK, that’s an oversimplifaction, and we’ll have to see what happens.)

The reason behind this is basically that the NR issue exposed the fact that a large bank could make lots of loans, and if some of them went pear-shaped, could ask the taxpayer to bail them out… BUT, and this is important, not give the taxpayer / government any rights to demand changes, but leave in place the Directors who got the bank into problems in the first place.

What Mr. Darling wants to do is set up a system whereby, if the taxpayers bail out a bank, the government (or its agency) can take control for a while, in exchange for stumping up the bailout cash.

The new Chief Exec is Andy Kuipers, who had left a few months ago, but has just been reappointed as a Director!

Virgin seems to be the only game in town left for rescuing the crippled bank, since talks with Olivant (the other bidder) seem to have fallen through.

The new chairman, Bryan Sanderson (who took over in October following the resignation of Matt Ridley), has made the normal positive noises about how Andy Kuipers is the right person for the job.

Northern Rock are being coy about the payoff, and have said the departing Mr Applegarth will be paid “substantially less than the amount which he would otherwise be due.” I suspect that the staff and shareholders who have been rioting in the streets had he been allowed to run the bank into the group and leave with a massive cash bonus (and rightly so – personally, I support big bonuses for people who do well, particularly Entrepreneurs :-), but have a REAL problem with people who expect big bonuses or payoffs for letting companies fail.)

You’ve got to wonder how long either Mr Sanderson or Mr Kuipers will last when the new owners come in? That, I suspect, is a question that only Mr. Branson can answer!

The BBC’s Bob Preston has made some comments that have worried me more than a little.

Firstly, he noted that Swiss giant UBS has just announced FURTHER losses of £4.9 billion due to the subPrime crisis – these are on top of the £1.8 billion it announced in October.

UBS is still standing up OK though, although these losses mean that it will make an overall loss this year, it’s just managed to raise £4.8 billion – not from its own Government (Mr. Darling, take note), but from the Government of Singapore’s Investment Corporation.

To put things in perspective, that’s about 3 times as much money as it looks like Northern Rock is going to end up needing to patch its problems.

UBS’s borrowing is in the form of “convertible shares” – firstly the Singapore Government lends UBS the money – at 9% interest – for two years. Then, at the end of that, it can convert that loan into shares if it wants to. A nice little earner for a government sitting on a lot of cash.

On the other side of the Atlantic, Citigroup has just raised $7.5 Billion – and it is having to pay 11% interst – this time to the Abu Dhabi Investment Authority.

Now, if banks like Citigroup are having to pay 11% interest to borrow money, and even the normally-conservative UBS are paying 9%, it doesn’t bode well for UK borrowers.

According to a report by Moneyfacts, over the last two years, the average mortgage arrangement fee was:

£441 in November 2005

£827 now

That’s an increase of over 87%, which is getting close to having doubled.

The trend behind this has been of lenders wanting to quote low headline rates, but make up their profits by charging such fees. About the worst culprit was Northern Rock, who have been charging such fees as 3.5% on some mortgages.

In September 2006, I wrote an article on the impact of fees, which was beginning to grow then. You can